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Investment lessons from the last downturn

The last downturn is long gone, but its lessons linger for long-term investors. Steve Giles uses the last sell-off to show how a balanced asset allocation can both lessen the impact of a downfall and hasten a portfolio’s recovery. Steve spoke with Joel Dresang in a Money Talk Video. A transcript of the video follows. 

Joel Dresang: Steve, as the stock market keeps climbing and setting new records, it’s human nature to wonder when this is going to be over and what’s going to happen next. I thought it would be good to look back at the last downturn.

Steve: Joel, I think it’s important for investors to recognize that no one knows when the next sell-off is going to be, and while 2018 earnings look pretty good and the forecast might be favorable, at some point this market will sell off.

Joel: So, let’s look at that last downturn. We’ve got a graphic here that helps illustrate it.

If we look at the S&P 500 as a broad measure of stocks, a hypothetical $100,000 investment in 2007 would have sunk more than 50% by March of 2009, and eventually that recovered back to $100,000 three years later, in March of 2012. That’s with dividends reinvested.

Now, if we compare that to a more balanced portfolio of 60% stocks and 40% bonds, that $100,000 would have sunk about 32% before recovering in late 2010. Again, that’s total return including interest and dividend payments.

So what do you see there, Steve?

Steve: Well Joel, a picture speaks a thousand words, and the takeaway is pretty simple here. The more balanced allocation certainly had less volatility and didn’t lose as much money, one. Two, the more balanced allocation recovered a lot sooner.

Joel: So what are the advantages of having that 40% in bonds?

Steve: Joel, one of the main advantages is for those that are in retirement. Forty percent in bonds means they’re able to meet 4% withdrawal rates for at least the next 10 years. That means you don’t have to worry about what the stock component does for the foreseeable future.

For those that are not yet in retirement, not yet taking withdrawals, the 40% in bonds is going to give them some dry powder so they can take advantage of the market having sold off to buy when prices are low.

Joel:  Now, that’s just the last downturn, which was nothing like any downturn before that. The next one probably will look different. What sorts of general lessons can we take from this?

Steve: Well, I think two things Joel. One, stay invested and two, be diversified. As we can see from the graphic, you want to stay invested because we know the market’s going to recover, and with a balanced allocation, you’ve reduced the amount of time that it took for you to get back to break-even.

Two, to be diversified. That’s the whole reduction of volatility that we’ve got from a 60/40 mix.

Joel: Steve, that diversification – the balance – is different for every person. How do you determine what’s the right mix of stocks and bonds and other assets?

Steve: Well Joel, it depends. Everybody has a tolerance for risk that is different. Everybody has a time horizon that’s different. One of the things that we try to do is help clients recognize what their needs are, and then we come up with a plan based upon those needs.

That plan might be different from one to the next. The important thing is that you recognize that you need to come up with a plan.

Coming up with the plan is important because it helps us to remove emotion from our investing decisions. If you have a plan and we go through another downturn, you’re more inclined to stay the course rather than let your emotions make investment decisions you might regret later.

Steve Giles is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Jason Scuglik and Peter May

Learn more
Total return: Your full investment picture, a Money Talk Video with Paige Radke
Corrections: A normal part of investing, a Money Talk Video with Marc Amateis
Safe investment withdrawals for retirees, a Money Talk Video with Art Rothschild
Risk: How much can you stand? How much do you need?, a Money Talk Video with Isabelle Wiemero
Rebalancing: More investing, less emotion, a Money Talk Video with Steve Giles

(initially posted Jan. 3, 2018)

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